Annual Equivalent Rate (AER)
Definition of 'Annual Equivalent Rate (AER)'
The AER is a more accurate way of comparing interest rates than the simple interest rate, because it takes into account the effect of compounding. For example, a savings account with an interest rate of 5% per year will have an AER of 5.12%, because the interest is compounded every year.
The AER is also useful for comparing different financial products, because it allows you to see how much interest you will actually earn over time. For example, a loan with an interest rate of 5% per year and a repayment period of 5 years will have an AER of 5.61%, because the interest is compounded every year.
It is important to note that the AER is not the same as the effective annual rate (EAR). The EAR is a measure of the interest rate on a financial product, taking into account the effect of fees and charges. The AER does not take into account fees and charges, so it may not be as accurate as the EAR.
The AER is a useful tool for comparing interest rates and financial products. However, it is important to understand how it is calculated and what it does not take into account.
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